Liability insurance provides for your defense and pays legal judgments on your behalf. People who buy liability insurance frequently make two mistakes:

• They buy far too little coverage. “How much is enough liability insurance?” you may be asking. It depends on who the victim is. It also depends on how suable you are. I call this your suability factor.
• They buy inconsistent limits. For example, they have a $100,000 limit on their car, $300,000 on their home, and $50,000 on their boat. Suppose these are your limits and you injure someone seriously with your car. You have only $100,000 of coverage, yet had the same injury occurred at home, you would have $300,000 of coverage. See how illogical that is? Your only hope for enough coverage in this scenario is to drag the victim’s bleeding, unconscious body home, throw him down the stairs, and hope he doesn’t remember the car accident!

I cover how to fix both of these common mistakes in the following sections.

Your suability factor

I define suability factor as the probability of an injured party suing you for large sums – often for more than the amount of liability insurance you’re carrying. In order for that to happen, you must be worth something, either currently or in the future. Why? Because if there’s nothing to go after – no pot of gold at the end of the rainbow – many attorneys won’t take the case and help an injured party sue you.

Your suability factor is influenced by several elements:

• Your current income: The more you make, the higher your suability factor.
• Your current assets: If you have expensive cars and homes, lots of investments and savings, and other assets, your suability factor is higher.
• Your future income: If you’re a medical intern, a law-school student, or an MBA student, your suability factor is higher, even if you’re currently living in a studio apartment and eating ramen noodles every night.
• Your future assets: If your parents are wealthy and you stand to inherit a good chunk of change, your suability factor is higher.

People with high current incomes or assets usually are aware of their suability. But people with little current income or assets often overlook their future income or asset potential and the effect it has on their current suability.

If you have one or more of these four elements contributing to a high suability factor, you’re more apt to be sued for amounts greater than your insurance coverage, and you need higher liability limits on all your insurance policies. An added advantage of higher liability limits is that the closer your liability limit comes to the economic value of the injury you cause, the greater the likelihood that the injured party will settle for your insurance policy limit and not pursue you – personally – beyond that.